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Bidding increments

I'm a little unsure of exactly how AS works, so can someone please clarify which of the following happens, either:

(1) AS at the point of sniping would check the maximum price currently bid for an item and then bid the next increment up to the maximum price I have specified.

Or

(2) Just simply tries to bid whatever I have specified as my maximum bid.

Would seem that it would be a better system and more cost effective if option (1) was the way AS worked. Can someone please clarify this for me.

Thanks
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